What Affects Mortgage Rates in Canada?

Understand the key factors that affect your mortgage rate, and how to potentially secure a better one.

Key Takeaways

• Mortgage rates are influenced by the Bank of Canada’s overnight rate.

• Your credit score, down payment, and loan term all impact your rate.

• Economic conditions, inflation, and lender competition also play a role.

• Understanding these factors helps you choose the right time and rate type.

Why Do Mortgage Rates Go Up or Down?

The Bank of Canada’s Role

The Bank of Canada (BoC) sets the overnight lending rate, which directly impacts variable mortgage rates and indirectly influences fixed rates.

When the BoC raises its rate to fight inflation, borrowing becomes more expensive, which can increase mortgage rates. Conversely, when they lower it to stimulate the economy, rates often drop.

📌 Tip: If the BoC is expected to raise rates, locking in a fixed rate sooner might be wise.

Personal Factors That Affect Your Mortgage Rate

1. Credit Score

A higher credit score usually means a lower interest rate. Lenders see you as less risky, and they reward that with better terms.

Improve your rate by:

• Paying bills on time

• Reducing credit card balances

• Avoiding new debt before applying for a mortgage

2. Down Payment Size

The more money you put down, the lower your loan-to-value (LTV) ratio. A lower LTV = less risk for lenders = better rates.

📌 In Canada, putting down 20% or more can also help you avoid CMHC insurance premiums.

3. Mortgage Term Length

Shorter terms often come with lower rates but less long-term security. Longer terms offer stability—but sometimes at a slightly higher cost.

Choose based on how long you plan to keep the property and your tolerance for rate changes.

Market Conditions That Influence Rates

1. Inflation

High inflation usually leads to higher interest rates. This is because lenders need to protect the value of the money they lend.

2. Economic Growth

Strong economic indicators—like low unemployment and high consumer spending—can lead to higher rates. Lenders anticipate increased demand for borrowing and may adjust rates accordingly.

3. Lender Competition

Not all lenders offer the same rates. If one lender wants to gain more market share, they may offer better deals, especially to qualified borrowers.

📌 It pays to shop around or use a broker to access exclusive rate options. Click here to read more about how much you need to make to buy a house in the GTA!

Fixed or Variable? Timing Still Matters

Even after deciding between a fixed or variable mortgage, the timing of your decision can impact your bottom line.

Watch for:

• Upcoming BoC announcements

• Shifts in inflation trends

• Economic news that could signal changes in market rates

Pair this market awareness with your personal situation to lock in the best deal.

Final Thoughts

Understanding what drives mortgage rates gives you a serious edge as a homebuyer. You’ll know when to act, what to watch for, and how to prepare financially for the best results.

Curious about how these factors apply to you? Use our Mortgage Calculator or call (416) GET-ALDO to get personalized advice on rates and options that fit your unique situation.